Retail Blues Meet Global Finance

The economic crisis currently scorching balance sheets across the globe has finally reached up to singe some prominent retailers.

Companies like Nordstrom, Neiman Marcus and Saks which have so far been able to ride above the economy’s troubled waters, are now getting caught in the unprecedented economic downturn. In a nutshell, people are realizing that while they do need clothes, they don’t necessarily need fashion; or at least pricey fashion. This is an abrupt turnaround from the last several years of aspirational aquistion.

Basically, the party’s over.

Everyone’s Feeling the PainUntil recently, the conventional wisdom held that prestigious retailers were more or less immune to the credit crunch affecting the masses. Their affluent customers appeared to be just fine – if only a little more judicious with their spending than in the past. For many companies, that mirage has evaporated. In October Neiman Marcus and Saks posted declines of 27.6 percent 16.6 percent, respectively. Nordstrom, which lowered its third-quarter earnings outlook to a range of 32 to 37 cents, suffered a 15.7 percent comparable-store decline.

Boston Area Gap Store

Specialty retailers weren’t spared either. Gap North America and International put up comparable store declines of 14 and 5 percent, respectively, modest in comparison to Banana Republic and Old Navy, which registered decreases of 17 and 20 percent, respectively. Ouch.

According to Burt Tansky, CEO of Neiman Marcus, high end customer service will not suffer. In today’s DNR, he stresses that the stores will continue to offer “high-level service” and that associates will continue to be work closely with customers. “They are obviously still shopping, just shopping less and shopping more focused.” He also said his customers’ shopping habits are very much tied to the stock market and that “based on our experience in previous business cycles, we believe our customers’ buying levels will increase once the economic environment stabilizes.”

Though many retailers were expecting soft numbers going into the fall, the reality of the situation is on the bleaker side. Slowing sales and cautious shoppers are hitting everyone in the sector harder than anticipated. This is not a purely domestic virus. No, the international flavor of this crisis is a sign of things to come. When American debt held in Asian funds invested in by German insurers goes bad because of residential foreclosures in Detroit, you know we are in a new place.

Bucking the TrendMid-tier retailers like Macy’s, J.C. Penny and Gottschalks had poor showings too, but not nearly as bad and their high-end counterparts. Discounters like BJ’s Wholesale – the place you go to buy a 20 pack of undershirts – showed positive numbers and WalMart, almost 2.5 percent. The message is clear, for the commodities of life, brand is no longer king; value is.

Ralph Lauren’s Chicago Flagship

All that said, which company totally out-performed the market? Ralph Lauren. The company posted a second-quarter profit gain of 39.6 percent that beat analysts’ estimates by 33 cents. For those of you who are not into market lingo – that is huge. Normally companies beat expectations by two or three cents, not 33.

The company announced that its online presence, RalphLauren.com posted double digit gains across all major categories. One reason for this strong showing could be the company’s brand diversification. With distinctive yet connected brands covering all price points, Ralph Lauren is able to compensate for slower sales of Purple Label inventory with greater demand in Chaps. The company also assumed full control of its Japanese operations this year, a move that will finally balance local inventory that heretofore always seemed skewed disproportionately toward menswear.

What does this all mean for clothing retailers? Well, first it means that things will probably get worse as we lurch toward what can only be described as an anemic looking holiday season. Actually, anemic may be too generous an adjective. Second, this situation is also a chickens-coming-home-to-roost situation for many high-end labels that courted mass market shoppers with discounted luxury. I wrote at length about this earlier in the year.

When the fiscal dust settles, we will invariably be in better shape as a market overall. Companies with thin financials and leveraged balance sheets will have fallen by the wayside. Those with solid business plans and strong fundamentals will see new opportunities here and abroad.

Consumers will likely set the tone for a while as designers and manufacturers keep their noses to the grindstone, producing goods which customers actually want to buy. Passionate visionaries will be able to capitalize on the new breathing space in the market and present collections that can help define our new economic and social reality.

If nothing else, this turbulent and exciting moment in history is signaling to people everywhere that no country, population, or financial demographic is an island anymore. Financially speaking, we are a vast interconnected web of commerce and no one is immune from catching the proverbial cold.

As deep and technical as that all sounds, I’m really curious as to how this will all be reflected in a runway show.